Tag Archives: finance

Euro under pressure in Asia amid ongoing debt woes

OKYO: The euro stayed under pressure in Asia on Friday amid investor jitters over the European debt crisis.

The common currency bought $1.3309 in Tokyo afternoon trade, compared with $1.3327 in London late Thursday. Against the Japanese currency it firmed to 103.03 yen from 102.87.

The dollar edged up to 77.42 yen from 77.11 as Japan’s finance minister said his ministry has been vigilantly watching for signs of speculative yen-buying movement in the foreign exchange markets.

The euro was on a downward trend as investors took a cue from Moody’s downgrade of Hungary’s credit rating, said a senior dealer at a major bank.

“You should expect volatile euro trading ahead as there’s much speculation going around, but what’s for sure is the euro is set to fall in the longer term as the debt woes are just too far from their end,” the dealer said.

German, French and Italian leaders pledged Thursday to propose modifications to European Union treaties to further integrate economic policy, but they played down suggestions that the European Central Bank would have a greater crisis-busting role.

Japanese Finance Minister Jun Azumi urged European leaders to take more steps to calm markets as the impact of the debt crisis spreads globally. (AFP

 euro, debt, under, asia, pressure, under pressure, pressure asia, amid, woes, debt woes, euro under, asia amid, ongoing, amid ongoing, ongoing debt, business euro, 2011, from, friday, european, against, tokyo, crisis, debt crisis, currency, news, said, follow, woes tokyo, tokyo euro, stayed, euro stayed, stayed under, asia friday, friday amid, investor, amid investor, jitters, investor jitters, over, jitters over, over european, european debt, common, crisis common, common currency, bought, currency bought, 3309, bought   tokyo, afternoon, tokyo afternoon, trade, afternoon trade, compared, trade compared, with, compared  , november, friday november, november 2011, program, japan, business, thursday, japanese, finance, minister, finance minister, markets, dealer, major, bank, fall, term, leaders, take, this, facebook, send, pakistan, windies, lanka, help, jail, years

Macroprudential policy Risky business

 THE new big hope of central banks is called macroprudential policy. During the boom, central banks used the fairly blunt instrument of interest rates as their main weapon. But since inflationary pressures were low, thanks to the deflationary shock stemming from China and eastern Europe, rates were kept low. This led to a splurge of asset-backed lending. Meanwhile, banks found easy ways to exploit the rules of the Basle accords – designed to ensure the system was well-capitalised. As a result, when mortgage-backed securities started to plunge in value in 2007, the banks were much less robust than was previously thought.

The Bank of England has set up a financial policy committee, which is just starting the arduous task of sorting out which principles it should follow and which policy buttons it can push. In a paper out today, it sets out its options. It starts by discussing the potential flaws in financial markets such as

incentive distortions which can, for example, arise from contracts that reward short-term performance excessively

informational distortions such as those linked to buyers doubting the quality of assets (adverse selection) or less than fully rational processing of information

co-ordination problems, where collective action, for example to step away from lending in a boom, may be in the interests of individual banks but there is no way to co-ordinate on this outcome

As the paper points out (and as Hyman Minsky famously noticed) there is a tendency for banks to get overexposed to risk in the upswing of a credit cycle. After all, it is the banks that are driving the cycle. As they become more confident about lending against assets, more funds are available to investors/speculators and asset prices rise, increasing the confidence of all involved. As a proportion of GDP, commercial lending to real estate doubled between 2002 and 2008. In the UK banking system, leverage (as measured by total assets to shareholders’ claims) increased from 20:1 to 50:1 within a decade. Both measures ought to have caused alarm but nothing was done.

There is little new in this, as the paper recognizes. Credit cycles have nearly always been marked by lending against property. But property is an illiquid market and prices fall very sharply when the balance of supply and demand shifts, often wiping out of all of a bank’s collateral. Meanwhile, the duration of bank funding was steadily falling, from an average maturity of 10 years in the early 1980s to four years by 2008 (the US followed a similar trajectory). This left the banks very vulnerable to a run on liquidity.

The FPC says the authorities have, in principle, three types of measure to deal with these risks.

those that affect the balance sheets of financial institutions

those that affect the terms and conditions of loans and other financial transactions

those that influence market structures

For example, balance sheet measures include maximum leverage ratios and liquidity buffers; the second group includes caps on loan-to-value ratios and minimum margins; the third includes requirements for disclosure to reduce uncertainty about the market exposure of individual banks, but also the use of central counterparties to clear trades.

The paper then conducts an excellent and clear-eyed assessment of the pros and cons of these measures, without coming to any definite conclusion (the paper is part of a consultation process). What is clear is that the authorities cannot rely on just one or two measures, esepcially given the proved willingness of banks to game the system. Of course, the authorities cannot prevent all future financial crises, but they can still be a lot more alert than they were in the early 2000s. The paper shows the FPC is making a good start.

this, comment, that, policy, economist, blog, report, recommend, 2011, from, macroprudential, macroprudential policy, buttonwood, banks, business, topic, doubleclick, lasn, eks2, lasn eks2, subs=n, eks2 subs=n, wsub=n, subs=n wsub=n, sdn=n, wsub=n sdn=n, ord=328282512, view, link, most, this blog, more, reply, risky, risky business, politics, policy risky, permalink, financial, profile, recommend comment, recommend report, report comment, permanent, report permanent, permanent link, link this, this comment, comment permalink, permalink reply, reply view, central, world, with, src=, border=, alt=, what, were, their, href=, width=, height=, border= alt=, 2012, markets, have, they, related, government, blogs, here, href= doubleclick, jump, doubleclick jump, jump lasn, ord=328282512 src=, src= doubleclick, doubleclick lasn, ord=328282512 width=, width= height=, height= border=, financial markets, after, correspondents, finance, which, economics, 20th, 20th 2011, like, comments, sz=125×125, economist blogs, click, click here, when, bank, public, blogs buttonwood, buttonwood 2011, 2011 macroprudential, http, exchange, notebook, than, readers, economy, recommended, topics, over, debt, named, named after, blog correspondents, hope, free, lending, term, most recommended, would, capital, hedge, political, blog named, rates, january, culture, life, twitter, thanks, much, just, banking, been, time, items, sales, name, commented, most commented, central banks, interest, find, europe, follow, today, there, credit, prices, market, balance, problem, into, book, hedgefundguy, columnist, takes, takes name, name from, here find, find more, more href=, britain, americas, science, technology, eastern, game, lexington, work, asset, paper, risk, cycle, about, funds, years, other, clear, then, money, your, cornish, expat, cornish expat, make, alt= click, provide, analysis, blog takes, american, interest rates, site, science technology, latest, free exchange, babbage, america, since, found, system, banks were, those, assets, measures, these, part, merry, fund, mission, failure, mission failure, vote, time vote, link exchange, could, will, around, better, trade, guide, guide hedge, hedge funds, wrote hope, news, british, tree, here href=, used, subscribe, newsletters, help, asia, africa, data, intelligent, world 2012, latest blog, posts, blog posts, americas view, bagehot, banyan, buttonwood notebook, multimedia, charlemagne, schumpeter, print, politics this, week, facebook, inflationary, since inflationary, result, value, such, example, real, leverage, often, liquidity, authorities, risks, without, what clear, clear that,